New Year, same debate about fair value

Over the holidays the American Banker ran a three-part series on Fair Value. I thought it was an interesting read. I'm not going to parrot the article text, you can read it here (subscription required).

Best quote of all three articles is from the managing director at Lord, Whalen LLC's Institutional Risk Analytics:

"In between when you buy something and when you sell something, valuing it may be an interesting exercise, but it may not be one that is practical...the only time you can value something dynamically is if it is traded — if you have a visible, public price. Otherwise, who wants to know?"

I agree, running all this recent market volatility through the income statement for balance sheet instruments that aren't actively traded seems silly. If you think bank financial's are complex now, just wait until you bury "estimated fair values" in there. What a mess that will be.

Most naive quote from the articles is from a professor of finance at Stanford:

"Companies, of course, aren't supposed to use the new standard as a way to manage earnings — they're only supposed to use it to get a closer approximation of fair value...but accountants will sometimes be led to do what management of a bank wants them to do."

What an understatement. Fair value is a great new tool to use to manage earnings. It's going to give a whole new meaning to "creative accounting". And accountants are "sometimes" led to what management wants them to do? Please, in the real world when aren't they led by what management wants them to do?